Is it Time to Pull the Trigger on Mortgage Refinancing?

There are several reasons why mortgage holders might refinance, but the most clear-cut reason is when there is an opportunity to get a lower interest rate. This form of refinancing pays immediate dividends in the form of lower monthly payments, and long-term benefits in the form of lower interest expense over the life of the mortgage. So, with interest rates having fallen recently, why would some mortgage holders still be holding off on refinancing? Even mortgage holders who understand the benefit of refinancing at lower interest rates can get frozen in their tracks by trying to figure out exactly when to refinance. It is important that mortgage holders fully understand the benefits of acting now versus holding out for a better deal.<?xml:namespace prefix = o />

Picking Your Spots to Refinance

In theory, this shouldn't be a dilemma. If lower interest rates save the mortgage holder some money, why wouldn't that mortgage holder refinance every time interest rates fell? After all, if they fall some more, can't the mortgage holder just refinance again?

The reality is that there are fees associated with refinancing, so it is not practical to refinance every time a marginally lower interest rate is available. It's easy enough to figure out how much of a drop in interest rates will make up for refinancing fees, but the existence of those fees creates a disincentive for mortgage holders to refinance as frequently as possible.

It is this disincentive that leads mortgage holders to hold out for the best interest rate opportunity possible. If interest rates fall, they might be inclined to wait and see if they will fall further. The risk, of course, is that interest rates could bounce back up, and the opportunity could be gone.

Knowing the Odds

Deciding when to pull the trigger on refinancing is more than just a guessing game, it's important to know the odds. At the end of March 2008, thirty-year mortgage rates had fallen to 5.85%. Looking at over thirty-five years of historical mortgage rate data, it is possible to see how common it is for interest rates to be below 6%, and how likely rates have been to go higher or lower than current levels.

The first thing that jumps out of the historical data is that there is no such thing as a "normal" interest rate. Thirty-year mortgage rates have jumped around over the years, never settling at any given level much of the time. Still, while there is no one norm for interest rates, the 5.00% to 5.99% range is clearly out of the ordinary. Thirty-year mortgage rates have only fallen into that range some 6.77% of the time. As for the 5.85% mortgage rate as of the end of March, thirty-year rates have only been below that 4.97% of the time in the past.

In other words, whether or not mortgage rates get even lower than 5.85% is anybody's guess, but we can say quantitatively that the odds are against it.